The week that was (June 17-21)
- CBN’s ‘radio silence’ on OMO activity: Money markets remained liquid for the second consecutive week as the CBN did not conduct any OMO bill auction. This helped keep the interbank rates in single digits: OBB (8.7%) and OVN (9.2%). However, front-end yields closed higher (+20bps on average) driven by profit-taking along the 3M NTB (+20bps to 11.2%) and 6M NTB (+45bps to 12.7%) while the 1-yr NTB was flattish at 13.6%.
- Higher oil prices and a dovish US Fed drive modest declines at the long end: FGN Bond yields closed lower (down 7bps on average) with significant dips on the FGN 2022 (-64bps w/w). A jump in oil prices over the week (+5% w/w) and a dovish forward guidance by the US Federal Reserve in the run-up to looming redemption of the June 2019 bond maturity (NGN351billion) looks to have weighed on bond markets.
Figure 1: Naira Yield Curve
- Higher food prices nudge headline inflation higher: The NBS released the May 2019 CPI report which showed that headline inflation accelerated to 11.4% y/y (11.37% y/y) contrary to my views about a possible moderation. This reflects a faster rise than I anticipated in farm produce inflation at the start of the lean season when more food items are out of stock. Farm produce readings are now nearing the 1.5% monthly level seen in 2018 and are acting to drag the wider food CPI higher with food inflation up 9bps to 13.79% y/y. However, the underlying inflation picture continues to show signs of weakness with core inflation sliding further into single digits (down 25bps from April to 9.03% y/y). Thus, with food pushing up on seasonal items and core holding steady its easy to see why headline remains stuck in the going-nowhere region of 11-3-11.4% which it revolved around over the last 12 months. Over the rest of 2019, farm prices should slow down over the second half with harvest leaving full year average likely in the 11.1-2% range. This comes with the caveat that the naira remains stable and fuel and electricity prices are unchanged.
Figure 2: Inflation: Food, farm produce and headline
- DMO signals a likely Eurobond sale: Throughout the 2019 budget passage season, the DMO appeared tight-lipped over whether a Eurobond sale was on the cards – likely worried about having to fight off growing concerns about the rising share of commercial debt in Nigeria’s external debt mix (2018: 44% of USD25billion). Though the 2019 budget was passed with a deficit of NGN1.7trillion to be financed by local and foreign borrowings of equal share (ie NGN850billion or USD2.4billion), emphasis was placed on concessionary financing as another fresh Eurobond sale would mean that Eurobonds now represent the largest share of external debt. Crucially 2018 was the year, interest costs on external debts jumped to 7.4% (vs 3.1% previously) following the spate of Eurobond sales. This suggests a smaller size possibly in the USD500m to USD1billion region. Luckily the US Federal Reserve looks set to embark on a monetary accommodation which should translate to a lower costs than in 2018 Eurobond sale.
Figure 3: External Debt Mix and Interest cost
The week ahead (June 24-28)
- In the week ahead, the FGN has a bond maturity of around NGN351billion while a NGN2.3billion Bayelsa state bond also matures over the weekend. Shorter dated maturities are smaller around NGN17billion in OMO bills but FAAC inflows are expected over the week. The build-up in system maturities suggests the CBN should at least return to debt markets with some OMO auctions this week. The DMO will hold the monthly bond auction where it has NGN100billion on offer across 5-year (NGN30billion), 10-year (NGN40billion) and 30-year (NGN30billion) maturities.